We met with the management recently to obtain some company updates, especially on the construction and concession segments. Key takeaways are as follows:

A Good Start for Construction Division in 2018

Pesona experienced order book replenishment drought in 2017, in which it did not secure any new construction jobs last year. It sees a reversal of fortune this year as the group has secured RM378.2mn in new orders in 1Q18.

Its outstanding order book stood at RM1.9bn as of end-December 2017 (including new jobs secured in 1Q18), translating into 3.6x FY17 construction revenue. This should last the group till early 2021. Currently it is bidding for a few high rise buildings jobs. For civil works, it is keen to participate in upcoming packages for Central Spine Road.

As the group has a good start by securing RM378.2mn of new construction jobs in the early part of the year, we revise our FY18 order book replenishment assumption from RM500mn to RM800mn.

Margin Affected by Depreciation Cost

Management explained that the decline in construction margin from 8.4% achieved for FY16 to 4.8% recorded for FY17 was largely due to higher depreciation on construction equipment as the group upgraded and maintained state-of-the-art equipment at construction sites. For FY18, we forecast similar mid-single digit construction margin as we expect depreciation cost would remain a drag on the margin.

Delay in Acquisition of the Remaining 30% of SEP Resources

The acquisition of a 70% stake in SEP Resources (M) Sdn Bhd (SEP), which holds the concession for Universiti Malaysia Perlis student hostel, was completed in end-September 2017. Subsequently, 27.7mn consideration shares of PESONA was issued and listed on 9 October 2017. However, there is a delay in the acquisition of the remaining 30% of SEP. Bursa Securities has granted PESONA an extension of time until 30 September 2018 to complete the acquisition of the remaining 30% of SEP. We understand that further extension of time is unlikely.

Impact

Adjustments to earnings forecasts were made to factor in: i) an upward revision in FY18 order book replenishment assumption from RM500mn to RM800mn; ii) revenue recognition and reduced margin for West Coast Expressway package 6 as the works are progressing slower-than-expected due to land acquisition issues; and iii) incorporation of minority interest for the student hostel concession business given the uncertainty in the acquisition of the remaining 30% stake in SEP. All in, we reduced FY18 and FY19 earnings estimates by 14.3% and 6.7% respectively but raised FY20 earnings forecast by 7.2%.

Valuation

Following the revision in earnings forecasts, we arrive at a lower target price of RM0.42, from RM0.45 previously. Maintain BUY on the stock.

Source: TA Research - 7 May 2018